I have a Will client who owns a property in his sole name. Both his parents live in the property, the client lives elsewhere. The property is worth £370,000.
The client has a taxable estate. His parents’ estate is not currently taxable.
On his death, he would like his parents to have the right to occupy the property for their lifetime.
I am concerned that this may mean the same asset is subject to IHT 3 times.
My thoughts are: when client dies, entire property is subject to IHT. When parent 1 dies, the entire value of the property will be subject to IHT, this will wipe out their nil rate band and the additional £50,000 (on current figures) is subject to IHT. When parent 2 dies, there is subsequently no transferable nil rate band available, and again, this will wipe out parent 2’s nil rate band and the additional £50,000 is subject to IHT.
I should be grateful to know your thoughts on if you would agree with the same.
I am not sure I can answer this without generalising as the given facts, though significant, are too few. In particular what are the ages of the parents, what are the son’s own family circumstances (?married, ?children), what is the property’s CGT base cost, where would he want the property to go if he predeceased both his parents?
First, his Will. (The likelihood is statistically that he will survive both his parents; I assume all parties are in normal health). If he gives them joint life interests in the property by will these will be IPDIs. On the death of the first parent to die, the spouse exemption will apply. The 50% of the property deemed to be in the estate of the deceased becomes comprised in the deemed estate of the survivor: ss18, 49,49A IHTA. There is no CGT disposal as the the property remains settled property. On the survivor’s death there will be an IHT death charge and a tax-free adjustment to market value for CGT. So in total 2 IHT charges on the market value of the property at 2 different times.
As the IHT on the son’s own death is unavoidable his Will could leave the property to a discretionary trust of which his parents and any other persons he wished to benefit after they have both died would be eligible beneficiaries. A letter of wishes could ask the trustees (who could be his parents) to allow them to live in the property. The CGT base cost will be revalorised and PRR can be claimed on a distribution out of trust. RPT IHT charges may be nil or manageable depending on the property value and the son’s cumulation.
Secondly, the position could be improved by the son making a PET to his parents of the property. If they leave it to him in their Wills (and he does not “occupy”) it should not be a GROB but he must accept the risk they do not make appropriate wills or do but may alter them. They should not agree with him to make their Wills in this way or not to alter them and ideally it will be a residuary rather than a specific gift, with a letter of wishes as to the appropriation of the property to his share of residue. This should not be a gift by contract or otherwise including an associated operation. The CGT may be prohibitive. He could settle the property making a CLT with annual exemptions and NRB but unless he and any spouse or dependent children are excluded from the settlement hold-over relief will not be permitted. So the reversion to the life interests would have to be vested in someone else e.g. his adult children. Not attractive if he survives his parents.
To minimise the CGT he could give his parents each a small undivided share and rely on s102B IHTA to avoid a GROB as a non-occupying donor. Each parent should leave their share by Will to the other and the survivor to the son. Each joint owner has a right to occupy however small their share but this is a shearing exercise for IHT.
The donor does not give away what he retains so any GROB should be only in the shares given away. Avoiding “occupation” for GROB (and pre-owned assets charge) is dealt with in IHTM 14333 but not exhaustively. It seems that occupation must be distinguished from a right to occupy which is not exercised. In any case he can’t be taxed on the same property both as owning it and as a GROB.
But does it matter as long as it is correct that the GROB is only in the property gifted (my reading of s102 and 102A FA 1986)? Its value as a GROB will be small if the parents’ shares are small. The son must of course survive seven years but the PET will be small for the same reason (though loss to donor will apply and discounts will affect the TOV). In this way the main IHT charge will be that on his death on the then value of his share with small IHT charges, if any, on the prior death of the surviving parent. The IHT payable in total may be less than if nothing was done.